On November 17, 2005, the Bank for International Settlements released its regular semi-annual report on the over-the-counter derivatives of major banks and dealers in the G-10 countries for the period ending June 30, 2005. The total notional value of all gold derivatives fell to $288 billion from $369 billion at year-end 2004, a decline of more than 20% and the first time since June 2002 that total gold derivatives have failed to top $300 billion.

Indeed, it appears that Central Banks could well be turning into net buyers. Argentina reported adding 55 tonnes to its gold reserves during the last quarter of 2005. The Governor of the Reserve Bank of South Africa says it may soon add to its gold holdings. See S.Africa c.bank says might up gold reserves, Reuters (Nov. 14, 2005).

Recently the Russian central bank announced plans to double its gold reserves, raising them from 5% to 10% of total reserves. See V. Korchagina et al., President Supports Gold Plans, The Moscow Times.com (Nov. 23, 2005). Enlarging upon his support for the proposal, Russian president Vladimir Putin noted: "The reserves are after all gold and forex reserves. Let's not be too restrained here."

At almost the same time, an article in the officially sponsored China Securities Journal by an economist at state-owned China Galaxy Securities argued that China should raise its gold reserves to 2500 tonnes in the near to medium term with a longer-term objective of 3000 tonnes, putting it in roughly the same league as the IMF, Germany or France. See also J.A. Nones, When Will Asian Central Banks Buy Into Gold?, Resource Investor (Dec. 2, 2005); Asian central banks likely to increase gold reserves, People's Daily Online (Dec. 1, 2005).

As reported to the IMF at the end of September, Russia's official gold reserves stood at 387 tonnes and China's at 600 tonnes, suggesting that these two countries alone could take more than the total amount of gold available for sale under WAG II over the next four years. Not surprisingly then, as gold moved over $500 to prices not seen in more than 20 years, some analysts suggested central bank buying as a likely explanation. See, e.g., K. Morrison, Gold at new 24-1/2 year highs, FT.com (Dec. 7, 2005).

The latter story is interesting in two respects. First, the 500 tonnes substantially exceeds the 387 tonnes reported to the IMF. Second, at $480 per ounce (roughly the level of gold prices at and immediately preceding the date of the story), $6 billion of deposits equates to almost 390 tonnes. In other words, it appears that the Russian central bank has loaned out a quantity of gold curiously close to the total gold reserves that Russia reports to the IMF.

From 1996 through 2001, Russia reported to the IMF gold reserves ranging between roughly 400 and 500 tonnes. With the gold price suppression scheme then operating in high gear, it is quite possible that the IMF aid package to address Russia's 1998 economic crisis was conditioned upon, or secured by, deposits of large amounts of its official gold. Just as weak oil and gas prices exacerbated that crisis, today's strong energy prices benefit the Russian economy and dramatically improve its international financial position.

Unlike the ECB and other euro-area central banks, the Russian central bank has no obvious interest in rescuing primarily Western bullion banks from their short gold positions, but every incentive to demand satisfaction in bullion of any gold deposits that it may have with them. No central bank could move substantial funds into physical gold today without quickly driving prices far higher. On the other hand, to demand repayment of outstanding obligations denominated in gold is quite a different matter, at least where the great weight of any adverse consequences, including sharply rising gold prices, falls on parties for which the creditor has no supervisory or other responsibility.

Barbarous Relic at the Gate

[PHOTO: President Vladimir Putin at a mineral resources exhibition in Madagan in the Russian Far East, Nov. 22, 2005, Itar-Tass]

What message exactly was President Putin trying to communicate in this intriguing photo op? If he were only trying to give a boost to Russian gold mining, he did something that no head of a major gold producing country has done in a long while: support gold. A more interesting possibility is that he was signaling his support for any demands by the Russian central bank that its gold deposits be returned or repaid in kind.

Whatever his motives, this former Soviet spymaster appears to have let gold out of the closet where the guardians of the Western welfare states have tried to confine it. In so doing, he may have opened the door to gold again playing an important and possibly central role in the international monetary system.

Effecting a retreat that does not turn into a rout ranks among the most difficult of military maneuvers. Napoleon learned this lesson the hard way in Russia. So did the Germans under Hitler. And so, perhaps, will the Western central banks that have for the past decade waged war on permanent, natural money -- gold.

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